How Creditors Can Help Debtors.
Introduction.
This article will discuss how Creditors can help debtors and the available options for Creditors. Debt has been a significant problem in the UK for some time, but the combined pressures of Brexit and the global pandemic has exacerbated the issue. With an average household debt of £62,706, a figure which has risen in the last 12 months, there are more people than ever before who are struggling to meet their repayments.
Around 300 people every day are declared bankrupt or insolvent in England and Wales, with Citizens Advice Bureau dealing with 1828 debt cases every single day.
The approach that creditors take can play a significant role in the response of the debtor, and can either worsen or ease mental stress. A debtor who is overwhelmed and panicked is less likely to be able to manage their payments successfully, so it’s in everyone’s interests to opt for a collaborative approach.
It can be difficult to know what to do when faced with a debtor in default, but below are some key pieces of advice for creditors.
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Breathing Space
The government has recognised the spiralling difficulties with managing debt, and the additional stress it causes for those debtors genuinely trying to repay what they owe. This has escalated since the global pandemic struck, causing greater financial difficulties than before in many households.
To help facilitate debt repayment in a productive way that helps both creditors and debtors, the Debt Respite Scheme was brought into effect from May 2021. This legislation is usually referred to as Breathing Space Moratorium.
A breathing space is an official arrangement which is agreed between a debtor and a recognised debt advisory service. Creditors are not able to prevent a breathing space from being implemented. If a breathing space is agreed, creditors must stop all enforcement action, including communication, for a period of 60 days. If the breathing space has been agreed due to a mental health crisis, it may last for longer.
Only debtors who are genuinely in financial difficulty but are making every effort to meet their obligations will have a request for a breathing space granted. It isn’t a payment holiday, but any interest, penalties or charges must be frozen during the breathing space.
If creditors want to challenge the breathing space, they may ask for a review - but this course of action is rarely in their best interests. The breathing space will be reviewed midway through the 60 days by the debt advisor, and only debtors who are actively engaging and looking for long-term solutions will be granted a continuance.
The idea of a breathing space is to allow debtors some time to make arrangements to come to an affordable agreement with their creditors that they can stick to in the longer term. The debt advisor will normally be in charge of all communication, so as a creditor, you should not be corresponding with the debtor.
As frustrating as it may be to have a debt that’s not being repaid, it’s a good idea for creditors to fully support the actions of the breathing space, and the debt advisors helping to set up an arrangement.
Court action is time-consuming and costly, and unless you’re sure of the financial background of the debtor and know that they have assets a bailiff can seize, you have no guarantee of being repaid. The best solution for all concerned is to come to a new agreement.
Improving Financial Management
Not everyone will qualify for a breathing space arrangement, but this doesn’t mean that you should take strong enforcement action against every debtor. Research suggests that creditors who are more supportive and willing to renegotiate with their debtors get a far better outcome than those who try to intimidate individuals into payment.
It is possible for creditors to work collaboratively with debtors and debt advisory agencies, even in the absence of an official breathing space. By opting to help debtors, creditors typically reap the benefits, and the individual can address any wider debt issues too.
Studies suggest that many individuals struggling with debt find it difficult to access the right kind of help, partly because of the wide and diverse range of options available. With some rogue organisations making wild promises while charging a hefty fee, individuals who have financial difficulties often don’t know where to turn. This is where you can provide invaluable advice.
Creditors can signpost debtors to genuine debt advisory services, providing contact information to make the process simple. When an individual is overwhelmed by debt, it can feel like a big step to get in contact so anything that can be done to ease the process will be a huge help. This could include being able to transfer a debtor instantly for help, rather than expecting them to take action themselves.
When a regulated debt advisory service is supporting a debtor, a creditor knows that so-called priority debts will be repaid first. But it also means that all creditors will eventually receive payment, as part of a structured process which is affordable and sustainable. Without this in place, many debtors avoid acknowledging the debt, leaving creditors with no option but to pursue enforcement action. No one really wants this outcome, so supporting debtors from the start is the best avenue that creditors can opt for.
Offering Assistance In-House
Not all debtors will be willing to be referred for formal debt advice, and it may be that they don’t have any creditors. If this is the case, you may be able to support the individual by providing in-house debt advice and help with financial management.
It is standard procedure to send customers an income and expenditure form, or to complete one over the phone. If you have access to the Standard Financial Statement, rather than using your own forms, this will make the process easier if the debtor ever needs to access full debt advice.
The financial statement you send to the debtor should allow for all their costs to be accounted for. This should include an amount set aside for any emergencies and savings. This allows the debtor to build some financial resilience in case of future temporary difficulties or a shortfall in income.
Once you receive the completed financial statement, you should ensure that the amount the debtor is suggesting as a repayment is reasonable and sustainable. You might also suggest that they check the figures if any seem particularly low or unrealistic, such as a weekly food budget. The idea of a financial statement is not to leave the individual struggling to pay for the basics, but to create a longer term solution which is financially viable. This will also help the debtor create healthy financial habits that will benefit them in the future.
Some debtors want to engage with advice, but find it difficult to take the necessary steps. A phone call can be hard for some to manage, while using the mail is too slow and creates more anxiety. Wherever possible, offering debtors the chance to engage with a range of different communication methods including phone, post, email and live chat will result in the best possible outcome.
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